AgDM newsletter article, March 1999
Don Hofstrand, retired extension value added agriculture specialist, firstname.lastname@example.org
We see it every day. People quitting farming and moving into off-farm employment. The remaining farmers swallow up the land and machinery that’s left behind. At the same time, the companies involved in food processing, genetics, and other non-farm businesses in the agriculture industry seem to be flourishing. In addition, the nation’s consumers have the highest quality, safest, most nutritious and lowest cost food of any place in the world.
Why does this dichotomy exist? What forces are at work?
Agriculture is more than just farming
We often mistakenly assume that farming and agriculture are the same thing. However, agriculture is much more than just farming. Agriculture includes all of the processing, packaging, and retailing that occur after agricultural commodities leave the farm gate. In addition, agriculture includes the seed, fertilizer, and other inputs that the farmer buys.
The agriculture industry can be divided into three sectors.
Agriculture sector trends
The size of the agricultural industry (as measured by income to the industry) has increased substantially over the century. Agriculture has increased from $72 billion in 1910 to $306 billion in 1990 – more than a four-fold increase. These figures have been adjusted for inflation (1984 dollars); otherwise the increases would have been even greater.
Virtually all of the increase has been in the marketing sector that increased from $35 billion to $226 billion. This increase is evident when we consider the increase in the amount of packaged and prepared foods that are now available. During this period, the amount going to the farm sector actually declined.
Next, let’s examine the relative (percentage) distribution of the agricultural industry to each of these sectors and how the distribution has changed over time. In 1910, the farming sector received 38 percent. By 1990, the farmer’s share had dropped to only 9 percent.
Waves of farm prosperity
Throughout the century, successive waves of farm prosperity have been followed by periods of economic downturn. The farm sector’s share increased during the period from 1915 to 1920 (called the golden age of agriculture), but declined substantially into the depression of the 1930s. Once again during the mid-to-late 1940s, the farming sector prospered only to lose it during the 1950s. The third wave of prosperity was during the 1970s, which evaporated in the 1980s. Throughout the century, each successive wave has been smaller and the farm share has gradually declined.
What is causing the decline?
It is easy to see that the farm sector makes up a smaller portion of the agricultural industry than it did at the beginning of the century. However, the reasons for the reduction are more difficult to identify.
The most obvious reason is the increase in efficiency in producing agricultural commodities. Increased efficiency, when combined with a natural tendency to overproduce, results in reduced returns to the sector. Farming is a cost-driven commodity-based industry and will probably earn narrow profit margins. However, it will probably be profitable for those who remain in farming. It is a critical segment of the agricultural industry so the market economy will insure that a sufficient number of farm businesses will survive.
activities to the non-farm sectors
Another cause that is just as important but often goes unrecognized. Many of the activities that have traditionally been part of the farm sector have been transferred to either the input sector or the marketing sector. This transfer has been voluntary and has occurred as a result of technology. In fact, much of the technology adopted by farmers during this century has resulted in shifts of activities from the farm sector to the non-farm sectors.
The emergence and use of purchased inputs has caused a significant transfer of activity from the farming sector to the input sector. For example, the major source of fertilizer for crops previously came from animal manure that was produced on the farm. With the advent of commercial fertilizers, this activity was transferred to the input sector. Weed control was essentially done with mechanical tillage – a farming activity. The substitution of herbicides for mechanical tillage transferred another activity off the farm.
Even the transition from horsepower to mechanical power resulted in transfers of activities off the farm. Horses were often raised on the farm (or neighboring farms) and powered by feed that was produced on the farm. Tractors are produced off the farm and powered by fuels that are produced off the farm.
Examples of transfers of farm activities to the marketing sector are less common but still relevant. For examples, selling eggs door-to-door in town, or selling them directly to a grocery store was common in the mid part of the century. However, until recently, virtually all marketing activities have been transferred to the market sector because farmers sell (dump) what they produce into local commodity markets.
Will these trends continue?
The reduction in the size of the farm sector may continue. Farm activities may continue to be transferred to the non-farm sectors. Biotechnology will play an important role. Roundup Ready Soybeans and Bt Corn are current examples. A future biotechnological factor may be the development of perennial crops. Biotechnology also holds the potential for the development of competitive “non-soil” based agriculture.
How can the trends be reversed?
There is some evidence for the potential of reversing these trends. Below are movements occurring in the farm sector that may reverse them. However, reversing these trends will require a pro-active effort by farmers themselves.
The success of these movements is uncertain. Currently there is not sufficient momentum to reverse the trend of a decreasing farm sector. Farmers will have to champion these movements if they are to reverse the trend. One of the approaches farmers can use is to determine how value is created in the food supply chain and put themselves in a position to capture the value.
Due to our capitalistic system, the transfer of farming activities to the non-farm sector is usually accompanied by a transfer of the returns associated with these activities to the non-farm sector. Traditionally, farmers have been satisfied to abandon these activities and make up the economic shortfall by expanding farm size. Unless farmers take a stand to reverse these transfers, farm activities will continue to be transferred out of farming.
* This article is based on a presentation by Dr. Stewart Smith, Senior Economist, Joint Economic Committee, U.S. Congress, November 21, 1992.